AuM will grow while investors will display patience with long/short equity, according to Credit Suisse cap intro head

InvestorsLaunchesPrime Brokerage
06 Aug, 2012

Hedge fund Assets under Management (AuM) will continue to grow while many investors are still exhibiting patience with long/short equity, the global head of capital intro at Credit Suisse has said.

Pension funds have been a major driver behind the growth in hedge fund AuM, whose assets now stand at $2.1 trillion. “The flow from global pension funds will continue to be the main driver. With many plans currently being underfunded, they need to find uncorrelated sources of alpha which hedge funds have proven they can provide,” said Robert Leonard of Credit Suisse.

According to Preqin, hedge funds account for approximately 6% of public sector pension plans’ portfolios, up from 3.5% several years ago. A Citi Prime Services paper also confirmed pension plans will form a substantial bloc of capital inflows into hedge funds going forward as they increasingly shun underperforming traditional asset managers.

However, Leonard warned pension fund interest in hedge funds could prove to be a mixed blessing. “I believe that the real issue is whether there will be enough talented managers to generate outperformance for that additional capital headed towards hedge funds,” he said.

Leonard also refused to write off long/short equity just yet.  “Many investors continue to adopt a ‘wait and see’ attitude and will likely make a more definitive call on the strategy once they have a full year’s returns to consider. However, investors expressed some frustration after returns for long/short equity were below expectations in 2011. There seems to have been some carry on of that sentiment despite many managers generating better performance in the first part of the year,” he said.

Long/short equity has suffered substantial redemptions following poor performance in 2011 when it declined 8%.  There were $1.3 billion in outflows during the second quarter of 2012 despite the strategy posting a respectable 2.2% gain year-to-date.

Likewise macro has suffered a reversal of fortune with outflows of $3.5 billion following a 0.5% decline. Macro managers are struggling to make decent profits amid the eurozone turmoil. Even Louis Bacon, the legendary hedge fund investor, retuned $2 billion of client cash following a period of flat performance.

Leonard, however, is bullish on macro. “Many investors perceive that macro managers are the best positioned to outperform in the current environment.  This is seen somewhat as a function of their having a wider range of geographic markets and asset classes at their disposal.  Additionally, investors tend to see macro managers as having a more comprehensive view of what they consider to be a highly complex and evolving global economic picture,” he said.

Credit Suisse’s mid-year hedge fund investor survey highlighted credit relative value was the most popular investment strategy with 53% of investors intending to allocate to it over the next quarter. The strategy has been one of the best performers with the HFRI Relative Value Index gaining 4.2% in the first half of 2012 compared to the average hedge fund which is up 1.87%.

“Institutional investors have increasingly searched for strategies that are uncorrelated to global markets and other asset classes.  During this time, relative value products such as mortgage and corporate focused funds have demonstrated an ability to be less susceptible to the extreme market volatility created by the current macroeconomic conditions.  Investors see it as a way to potentially reduce the existing levels of volatility and correlation in their existing portfolios,” said Leonard.